Dell Faces Scrutiny After Court Documents Alleging Deceit Released

Case stems from sales of faulty servers made from May 2003 to July 2005.

By Natasha Watkins

07/02/2010

Dell has received a barrage of negative publicity this week after previously sealed court documents alleging the company sold defective hardware then engaged in a pattern of deceit to cover it up were made public.

The allegations center around a three-year-old civil lawsuit filed against Dell in Federal District Court in North Carolina that claims that Dell shipped at least 11.8 million computers containing faulty components and then tried to hide the problem from customers.

Advanced Internet Technologies (AIT) sued Dell in 2007, claiming that Dell sold the Fayetteville, NC company more than 2,000 OptiPlex desktops in 2003 and 2004, even though Dell management and employees knew that there were major flaws with the devices. AIT claimed Dell breached its warranty agreement after nearly all the OptiPlex computers had failed by November 2004.

The New York Timesreported on the case, citing company memoranda and other documents that allegedly show that Dell knowingly shipped the faulty computers to its enterprise customers from May 2003 to July 2005. The article suggests that Dell's employees were aware that the computers were likely to break, but tried to play down the problem to customers.

In one example, the New York Times described an e-mail exchange between Dell customer support employees regarding computers at a law firm, with a Dell worker allegedly stating, "We need to avoid all language indicating the boards were bad or had ‘issues' per our discussion this morning."

In other documents about how to handle questions around the faulty OptiPlex systems, according to the Times, Dell salespeople were told, "Don't bring this to customer's attention proactively" and "Emphasize uncertainty."

The issues affecting the Dell computers were part of an industry-wide problem with bad capacitors. However, the report suggests that Dell may have had bigger problems with its capacitors, made by Nichicon, than others in the industry.

The 11.8 million computers in question, shipped from May 2003 to July 2005, were Dell's OptiPlex desktop computers, which were primarily sold to business and government customers.

In a blog posting this week, Lionel Menchaca, Dell's "chief blogger," noted that the AIT lawsuit was three years old and did not involve any current Dell products. "This is an issue we addressed with customers some years ago," he wrote.

Dell also denied the allegations. "Dell did not knowingly ship faulty motherboards, and we worked directly with customers in situations where the issue occurred," Menchaca continued, adding that it was not a Dell-specific issue and that Dell had extended the warranty for up to five years for customers who had affected machines.

Dell suspended use of Nichicon capacitors after the company discovered a problem in its manufacturing process and worked with customers to fix OptiPlex computers on a case-by-case basis, Menchaca said.

"The capacitor failure rates varied depending on customers' environments and the number of Nichicon capacitors in the customer's motherboards," he wrote. "It's also important to note that AIT was using the OptiPlex systems as servers, a use for which they weren't designed. The company also admitted in its complaint that Dell fulfilled its warranty obligations to AIT until AIT decided to stop paying for the OptiPlex computers."

Earlier in the week, Dell said in a statement, as reported by the Austin American-Statesman, that the lawsuit was "old news" and would not affect its current business.

Dell saying the issue was in the past was probably not the right approach, suggested Roger Kay, founder and president of Endpoint Technologies Associates, a Wayland, MA-based technology market analysis firm.

"You'd like to let bygones be bygones, but the victim wants justice," Kay said. "But the other [more detailed] response was the right one, that those are allegations, many of which we dispute, many of which will come out in court." Kay stressed something that that claims against Dell are allegations only -- the case has not yet been decided.

"The situation here is that a single company is trying to make hay out of this," Kay said in a phone interview. "The company is saying because of various failures, it lost money in delivering computer services, and Dell is responsible for that. There is probably a grain of truth to that, but there also is probably a lot added on."

The most damaging allegation, if proven true, is that there was an explicit policy to hide knowledge of known problems, and if there was a script that people were following, Kay said.

The fact that no court date has been announced could show that Dell and AIT are negotiating a settlement, Kay speculated, adding that it would be in Dell's interest for the case not to go to court, not only for the harm it could do the company's reputation, but also to avoid copycat suits.

On the other hand, he points out, the fact that there has not yet been a settlement could indicate Dell has a strong position in the case.

Many of the examples in the New York Times article appear to have come from a memorandum that AIT submitted in the civil case to oppose to Dell's motion for partial summary judgment.

About the Author

Natasha Watkins is a New York-based freelance writer specializing in technology and business topics.